2013 closes with record catastrophe bond issuance: GC Securities

Significantly reduced pricing, relative to recent years, contributed to about US$7.1 billion worth of new property and casualty catastrophe bonds being issued in 2013, notes a briefing issued Thursday by GC Securities, a division of MMC Securities Corp.

2013 represented a record year for P&C issuance, notes a statement from Guy Carpenter & Company, LLC that details key findings of the briefing, Catastrophe Bond Update: Fourth Quarter 2013.

The briefing provides an analysis of activity and trends within the catastrophe risk market from the fourth quarter of 2013, and also includes the outlook for 2014.

The briefing notes influence from direct capital markets’ participation in reinsurance programs, coupled with catastrophic insured losses well below historical averages last year, put significant pressure on global catastrophic reinsurance pricing.

Catastrophe bond issuance of US$1.82 billion during the fourth quarter of 2013 was minimally offset by the limited amount of catastrophe bond maturities of US$360 million, resulting in a net change of risk capital outstanding of US$1.46 billion, the statement notes.

“As a result of the positive net change in risk capital outstanding, total risk capital outstanding at the end of 2013 reached an all-time high of US$18.58 billion, an estimated 16% of global property catastrophe limit purchased annually,” it adds.

Insurance-linked securities (ILS) issuance in 2013 Q4 remained robust, as sponsors issued US$1.82 billion of capacity, a level of issuance consistent with the fourth quarters in previous years.

“Overall, 2013 included seven new sponsors who collectively secured US$1.46 billion of catastrophe bond capacity,” Cory Anger, global head of ILS for GC Securities, says in the statement. “In addition to these new sponsors, another prevalent change in the market was the increasing use and acceptance of indemnity-based triggers.

“Given that spreads have tightened between indemnity and other trigger types, sponsors were inclined to take advantage of investors’ openness to indemnity triggers to reduce coverage basis risk without a material increase in pricing relative to non-indemnity trigger pricing,” Anger adds.

The report also offers a 2014 outlook. Traditional players, in particular, are hedging their bets and creating their own capital markets decisions to attract, manage and utilize capital from third-party sources, whether in the form of fund management, managed accounts or sidecars, the statement notes.

“This will allow reinsurers the opportunity to securitize the most capital-intensive parts of the business while providing valuable cost-efficient capacity on other business lines,” it adds.

“The growing influence of alternative markets capacity is pressuring traditional reinsurers’ business model and challenging them to compete against a model with lower-cost of capital that continues to enter the reinsurance market,” Chi Hum, GC Securities’ global head of distribution for ILS, notes in the statement.

“As the catastrophe bond market continues to mature, more new sponsors are looking to the alternative market space for meaningful capacity and we expect that this trend is likely to continue through 2014.”